Professional Documents
Culture Documents
Processing Accounting
Information
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objective Exercises Minutes Level
1. Explain the difference between an external and an
internal event. 1 10 Easy
4. Describe the use of the account and the general ledger to 6 10 Easy
accumulate amounts for financial statement items. 10* 20 Mod
11* 10 Mod
12* 20 Mod
13* 10 Mod
6. Explain the purposes of a journal and the posting process. 14* 20 Mod
15* 30 Mod
16* 15 Mod
3-1
3-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objective Alternates Minutes Level
4. Describe the use of the account and the general ledger to 9* 60 Mod
accumulate amounts for financial statement items. 10* 60 Mod
12* 45 Mod
13** 30 Diff
6. Explain the purposes of a journal and the posting process. 11* 30 Mod
14* 75 Mod
15* 75 Mod
Estimated
Time in
Learning Objective Cases Minutes Level
4. Describe the use of the account and the general ledger to 1 30 Mod
accumulate amounts for financial statement items. 5* 60 Mod
QUESTIONS
1. Both external and internal events affect an entity. An external event involves
interaction with someone outside of the entity. For example, the purchase of land
is an external event. An internal event takes place entirely within the entity, with
no interaction with anyone outside of the company. The transfer of raw materials
into production is an internal event.
2. Source documents are the basis for recording transactions. They provide the
evidence, or documentation, needed to recognize an event for accounting
purposes. Purchase invoices, time cards, and cash register tapes are all
examples of source documents.
3. Cash can take many different forms. One of the most common forms is a checking
account. Other forms include coin and currency on hand, savings accounts,
money orders, certified checks, and cashier’s checks.
4. An account receivable is an open account with a customer. That is, the customer
is not required to have prior written approval each time a purchase is made, and
no interest is charged. Most open accounts must be paid in a short period of time,
such as 30 or 60 days. A note receivable, however, involves a written promise
from the customer to repay a specified amount, with interest, at a specified date.
Companies usually require customers to sign promissory notes for relatively large
dollar amounts of purchases.
5. Assets and liabilities are opposites. An asset represents a future benefit, and a
liability is an obligation to relinquish benefits in the future. Therefore, an account
payable is the opposite of an account receivable. If Ace Corp. provides a service
to Blue Corp., Ace records an account receivable on its books. Blue will record an
account payable on its books.
6. According to the accounting equation, assets are equal to liabilities plus owners'
equity. Assets are future economic benefits. The right side of the equation is
merely a representation of the claims of various groups on the assets. The claims
of the owners, as represented by owners' equity, are divided into two types:
capital stock and retained earnings. The former arises from amounts contributed
by the owners to the business. Retained earnings represents the claims of the
owners on the assets from the undistributed income of the business. That is, it
represents the accumulated earnings over the life of the business that have not
been returned to the owners in the form of dividends.
7. The term “double-entry system” of accounting means that every transaction is
entered in at least two accounts on opposite sides of T accounts. In this system,
every transaction is recorded in such a way that the equality of debits and credits
is maintained, and in the process the accounting equation is kept in balance.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-5
8. Assets and liabilities appear on different sides of the accounting equation and are
therefore opposites. It is logical that if an asset is increased with a debit, a liability
is increased with a credit.
9. Assets are positive in that they represent future economic benefits. It is merely a
matter of convention that an asset is increased with a debit. An expense is
negative in the sense that it reduces net income, which in turn reduces retained
earnings, one of the two elements of owners' equity. Because owners' equity is on
the opposite side of the accounting equation from assets, it is increased with a
credit. Therefore, any item that reduces owners' equity, like an expense, is itself
increased with a debit.
10. There are two sides to every transaction. The two sides of the transaction when a
dividend is paid are the decrease in cash and the decrease in owners' equity
(owners' equity is reduced because money is being returned to owners, and they
have a smaller claim on the assets of the business). Assets are increased with
debits and decreased with credits. Cash is an asset and is therefore decreased
with a credit. Retained earnings is on the opposite side of the accounting
equation from assets and is therefore increased with a credit. Retained earnings
are decreased with a debit. Because dividends are a decrease in retained
earnings, they are increased with a debit.
11. When you deposit money in your account, the bank has a liability. The entry on
the bank's books consists of a debit to Cash and a credit to some type of liability
account, such as Customers’ Deposits. Therefore, when you make a deposit, the
bank "credits" your account; that is, it increases its liability.
12. A business actually saves time by first recording transactions in a journal and
then posting them to the ledger. Because of the sheer volume of transactions it
would be impractical to prepare financial statements directly from the journal. For
example, without the use of ledger accounts, it would be necessary at the end of
the period to go back and scan the journal to find every debit and credit to the
Cash account in order to prepare a balance sheet. Whereas the journal serves as
a book of original entry, the ledger accounts are the basis for preparing a trial
balance, which in turn is used to prepare the financial statements.
13. The T account is a simple device used in the study of accounting as well as by
accountants in analyzing transactions. The left side of the account is used to
record debits and the right side to record credits. The running balance form for an
account is more formal and includes not only columns for debits and credits, but
also a column for the balance in the account. Another important element of the
running balance form is a posting reference column. The accountant places the
page number of the general journal in this column so that each entry in the
account can be traced back to the relevant page in the journal.
3-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
14. At the time of posting, the posting reference column of the account in the ledger
is filled in with the page number of the journal entry. At the same time, the account
number is placed in the posting reference column of the journal. This cross-
referencing system used in posting allows the accountant to trace an entry made
in the journal to the account it was posted to, or, conversely, to trace from an
account back to the entry in the journal.
15. There is no standard rule about the frequency of posting entries from the journal
to the ledger. The size of the company and the extent to which the accounting
system is computerized will affect how often entries are posted. For example, in a
computerized system, it is possible for entries to be posted instantaneously to the
ledger at the time they are recorded in the journal.
16. A trial balance proves the equality of debits and credits. It does not prove that the
correct accounts were debited and credited or that the correct amounts were
necessarily recorded. It simply ensures that the balance of all of the debits in the
ledger accounts is equal to the balance of all of the credits at any point in time.
EXERCISES
1. E 5. I
2. E 6. NR
3. NR 7. E
4. E 8. I*
Type Example
1. a. Purchase inventory on credit.
b. Purchase land in exchange for promissory note.
2. a. Issuance of stock in exchange for cash.
b. Provide service in exchange for cash.
3. a. Repay bank loan with cash.
b. Pay supplier amount owed on open account.
4. a. Pay dividend to stockholders.
b. Pay wages to employees.
5. a. Collect amount owed from customer on open account.
b. Purchase inventory with cash.
3-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. $ 1,530 $ 1,530
2. $ 1,365 $ 1,365
3. $ 750 750
4. –4,240 $ 4,240
5. 2,500 $ 2,500
6. 890 –890
7. $ 50,000 $ 50,000
Bal. $ (100) $ 640 $ 1,365 $ 4,240 $ 50,000 $ 1,365 $ 2,500 $ 50,000 $ 2,280
8. –4,000 –4,000
Bal. $ (4,100) $ 640 $ 1,365 $ 4,240 $ 50,000 $ 1,365 $ 2,500 $ 50,000 $ (1,720)
9. –500 –500
Bal. $ (4,600) $ 640 $ 1,365 $ 4,240 $ 50,000 $ 865 $ 2,500 $ 50,000 $ (1,720)
1. Debit 7. Credit
2. Debit 8. Debit
3. Credit 9. Credit
4. Credit 10. Debit
5. Debit 11. Debit
6. Credit
The debits and credits are reversed in this entry. The correct entry is:
From the bank’s perspective, a customer’s account is a liability because the bank owes
that amount to the customer. Thus, when the liability account is increased, it is
increased with a credit. At the same time, the cash received from the customer is an
increase in the bank’s cash and, as an asset, cash is increased with a debit.
3-1
3-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Dr. Cr.
Cash $ 10,500
Accounts Receivable 5,325
Office Supplies 500
Land 50,000
Automobiles 9,200
Buildings 150,000
Equipment 85,000
Accounts Payable $ 7,650
Income Taxes Payable 2,500
Notes Payable 90,000
Capital Stock 100,000
Retained Earnings 110,025
Commissions Revenue 12,750
Interest Revenue 1,300
Commissions Expense 2,600
Heat, Light, and Water Expense 1,400
Income Tax Expense 1,700
Office Salaries Expense 6,000
Dividends 2,000 ______
Totals $ 324,225 $ 324,225
MULTI-CONCEPT EXERCISES
-0-Bal.
Delivery Services
125 (4)
200 (5)
325 Bal.
Dr. Cr.
Cash $ 4,695
Office Supplies 130
Van 15,000
Capital Stock $ 19,500
Delivery Services 325
Totals $ 19,825 $19,825
3-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. Supplies 1,365
Accounts Payable 1,365
Purchased supplies on open account.
3. Cash 750
Sales Revenue 750
Made cash sales.
4. Equipment 4,240
Cash 4,240
Purchased equipment with cash.
5. Cash 2,500
Notes Payable 2,500
Issued promissory note for cash.
6. Cash 890
Accounts Receivable 890
Collected open accounts.
7. Land 50,000
Capital Stock 50,000
Issued capital stock in exchange for land.
Assets = Liabilities + Stockholders’ Equity
+50,000 +50,000
–4,650 –4,650
General Ledger
Land Account No. 17
Post.
Date Explanation Ref. Debit Credit Balance
June 1 GJ 7 50,000 50,000
PROBLEMS
1. E Not recorded
2. E Recorded: Inventory, Accounts Payable
3. I Not recorded
4. E Not recorded
5. I Not recorded
6. E Recorded: Cash, Sales Revenue
7. E Not recorded
8. E Recorded: Salaries and Wages Expense, Cash
3-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. Just Rolling Along Inc. Transactions for the month of May 2007:
Revenues:
Rental fees* $ 4,800
Lessons 1,200 $ 6,000
Expenses:
Registration fee $ 15
Advertising 125
Salaries and wages 160 300
Net income $ 5,700
*$1,800 + $3,000
4. Given the line of business that they are in, the two college students may be
concerned about their liability. One of the advantages of incorporating is the limited
liability of the stockholders. Generally, a stockholder is liable only for the amount
contributed to the business.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-19
Revenues:
Computer installation services $4,000
Software selection services 2,800 $ 6,800
Expenses:
Advertising $1,300
Salaries and wages 3,300
Gas, electric, and water 1,400 6,000
Net income $ 800
4. Trade accounts often have a 30-day collection or payment period. For example,
cash should be received from the accounts receivable and cash paid for
the accounts payable during the month of April.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-21
MULTI-CONCEPT PROBLEMS
1. BLUE JAY DELIVERY SERVICE TRANSACTIONS FOR THE MONTH OF JANUARY 2007
Bal. $ 32,490 $ 8,410 $ 20,000 $ 60,000 $ 45,000 $ 3,230 $ 50,000 $ 100,000 $ 12,670
Assets
Current assets:
Cash $ 32,490
Accounts receivable 8,410
Total current assets $ 40,900
Property, plant, and equipment:
Land $ 20,000
Warehouse 60,000
Delivery trucks 45,000
Total property, plant, and equipment 125,000
Total assets $ 165,900
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,230
Long-term debt:
Notes payable 50,000
Total liabilities $ 53,230
Capital stock $ 100,000
Retained earnings 12,670
Total stockholders' equity 112,670
Total liabilities and stockholders' equity $ 165,900
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-25
1. NEVERANERROR, INC.
TRANSACTIONS FOR THE MONTH OF JUNE 2007
Assets = Liabilities + Stockholders’ Equity
Accounts Accounts Notes Rent Capital Retained
Date Cash Receivable Computer Payable Payable Payable Stock Earnings
6/2 $30,000 $30,000
6/5 –2,500 $12,000 $ 9,500
Bal. $27,500 $12,000 $ 9,500 $30,000
6/8 20,000 $20,000
Bal. $47,500 $12,000 $ 9,500 $20,000 $30,000
6/15 $12,350 $12,350
Bal. $47,500 $12,350 $12,000 $ 9,500 $20,000 $30,000 $12,350
6/17 –900 –900
Bal. $46,600 $12,350 $12,000 $ 9,500 $20,000 $30,000 $11,450
6/23 12,350 –12,350
Bal. $58,950 $ 0 $12,000 $ 9,500 $20,000 $30,000 $11,450
6/28 –2,700 –2,700
Bal. $56,250 $ 0 $12,000 $ 9,500 $20,000 $30,000 $ 8,750
6/29 $ 2,200 –2,200
Bal. $56,250 $ 0 $12,000 $ 9,500 $20,000 $ 2,200 $30,000 $ 6,550
6/30 –5,670 –5,670
Bal. $50,580 $ 0 $12,000 $ 9,500 $20,000 $ 2,200 $30,000 $ 880
6/30 18,400 18,400
Bal. $50,580 $18,400 $12,000 $ 9,500 $20,000 $ 2,200 $30,000 $19,280
6/30 –6,000 –6,000
Bal. $44,580 $18,400 $12,000 $ 9,500 $20,000 $ 2,200 $30,000 $13,280
TOTAL ASSETS: $74,980 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY:
$74,980
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-27
3. Yes, the outlook for the company looks relatively appealing. The company
operated profitably during the month of June and was able to generate
significant revenues and control its costs. The profit margin for the month was in
excess of 60%. In addition, it appears to be relatively liquid, with a current ratio
of over 5 to 1.
Accounts
Accounts
Debited Credited Debited Credited
a. 1 10 f. 1 2
b. 5 1, 9 g. 13 1
c. 6 9 h. 14 1
d. 3 7 i. 15 7
e. 2 12 j. 16 8
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-29
LO 3,4,5 PROBLEM 3-9 TRANSACTION ANALYSIS AND JOURNAL ENTRIES RECORDED DIRECTLY IN T ACCOUNTS (APPENDIX)
Bal. 33,150
Land Building
(10/2) 35,000 (10/2) 90,000
(10/3) 5,000
Bal. 95,000
6,200 Bal.
Retained Earnings
(10/26) 3,000 1,800 (10/13)
(10/27) 500 2,400 (10/13)
(10/30) 2,400 1,500 (10/17)
2,000 (10/24)
2,800 (10/24)
1,800 (10/31)
2,500 (10/31)
5,900 14,800
8,900 Bal.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-31
Dr. Cr.
Cash $ 33,150
Accounts Receivable 750
Land 35,000
Building 95,000
Concession Supplies 3,700
Accounts Payable $ 6,200
Notes Payable 112,500
Capital Stock 40,000
Retained Earnings 8,900
Totals $ 167,600 $ 167,600
Revenues:
Ticket sales $ 5,600*
Concession sales 7,700**
Rental revenue 1,500 $ 14,800
Expenses:
Utilities $ 500
Salaries and wages 2,400 2,900
Net income $ 11,900
*$1,800 + $2,000 + $1,800
**$2,400 + $2,800 + $2,500
Assets
Current assets:
Cash $ 33,150
Accounts receivable 750
Concession supplies 3,700
Total current assets $ 37,600
Property, plant, and equipment:
Land $ 35,000
Building 95,000 130,000
Total assets $ 167,600
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 6,200
Long-term debt:
Notes payable 112,500
Capital stock $ 40,000
Retained earnings 8,900
Total stockholders’ equity 48,900
Total liabilities and stockholders’ equity $ 167,600
a. Cash 200,000
Capital Stock 200,000
Issued 100,000 shares of capital stock for cash.
Assets = Liabilities + Stockholders’ Equity
+200,000 +200,000
b. Buildings 110,000
Land 40,000
Cash 150,000
Acquired building and land for cash.
Assets = Liabilities + Stockholders’ Equity
+110,000
+40,000
–150,000
c. Cash 125,000
Notes Payable 125,000
Signed three-year promissory note.
Assets = Liabilities + Stockholders’ Equity
+125,000 +125,000
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-33
1. T Accounts
325,000 228,000
Bal. 97,000
Land Building
(b) 40,000 (b) 110,000
-0- Bal.
Bal. 28,000
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-35
Dr. Cr.
Cash $ 97,000
Accounts Receivable 24,000
Land 40,000
Building 110,000
Office Equipment 50,000
Commissions Payable $ 3,500
Notes Payable 125,000
Capital Stock 200,000
Advertising Revenue 24,000
Wage and Salary Expense 28,000
Commissions Expense 3,500
Totals $ 352,500 $ 352,500
The Dividends error may have simply been the result of posting a debit in the
journal entry incorrectly as a credit to the ledger account. Or, it is possible that
Dividends was incorrectly credited in the journal entry. The transposition error in
the acquisition of the building and equipment in exchange for the note may
have resulted from posting $23,500 to the Equipment account instead of the
correct amount of $25,300. Or, as was the case with the dividends error, it is
possible that the entry to record the acquisition was incorrectly recorded as a
debit to Equipment for $23,500.
3-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
2. MALCOLM INC.
REVISED TRIAL BALANCE
JANUARY 31, 2007
Dr. Cr.
Cash $ 9,980
Accounts Receivable 8,640
Land 80,000
Building 50,000
Equipment 25,300
Notes Payable $ 75,300
Capital Stock 90,000
Service Revenue 50,340
Wage and Salary Expense 23,700
Advertising Expense 4,600
Utilities Expense 8,420
Dividends 5,000
Totals $ 215,640 $ 215,640
Dr. Cr.
Cash $ 32,490
Warehouse 60,000
Land 20,000
Delivery Trucks 45,000
Accounts Receivable 8,410
Accounts Payable $ 3,230
Capital Stock 100,000
Notes Payable 50,000
Service Revenue 15,900
Gas and Oil Expense 3,230
Totals $169,130 $169,130
3-38 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Assets
Current assets:
Cash $ 32,490
Accounts receivable 8,410
Total current assets $ 40,900
Property, plant, and equipment:
Land $ 20,000
Warehouse 60,000
Delivery trucks 45,000
Total property, plant, and equipment 125,000
Total assets $ 165,900
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,230
Long-term debt:
Notes payable 50,000
Total liabilities $ 53,230
Capital stock $ 100,000
Retained earnings 12,670
Total stockholders' equity 112,670
Total liabilities and stockholders' equity $ 165,900
1. Journal entries:
June 2 Cash 30,000
Capital Stock 30,000
Issued capital stock for cash.
Assets = Liabilities + Stockholders’ Equity
+30,000 +30,000
2. NEVERANERROR INC.
TRIAL BALANCE
JUNE 30, 2007
Dr. Cr.
Cash $44,580
Accounts Receivable 18,400
Computer 12,000
Accounts Payable $ 9,500
Notes Payable 20,000
Rent Payable 2,200
Capital Stock 30,000
Service Revenue 30,750
Advertising Expense 900
Utility Expense 2,700
Rent Expense 2,200
Salaries and Wages Expense 5,670
Dividends 6,000
Totals $ 92,450 $ 92,450
4. Yes, the outlook for the company looks relatively appealing. The company
operated profitably during the month of June and was able to generate
significant revenues and control its costs. The profit margin for the month was in
excess of 60%. In addition, it appears to be relatively liquid, with a current ratio
of over 5 to 1.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-43
A LT E R N AT E P R O B L E M S
1. E Not recorded
3. E Not recorded
6. E Not recorded
2. BEACHWAY ENTERPRISES
INCOME STATEMENT
FOR THE MONTH ENDED JUNE 30, 2007
3. BEACHWAY ENTERPRISES
BALANCE SHEET
JUNE 30, 2007
Assets
Current assets:
Cash $ 1,055
Accounts receivable 1,000
Supplies 50
Total current assets $ 2,105
Property, plant, and equipment:
Equipment 6,250
Total assets $ 8,355
a. The check paid for the security deposit and rent as well as a deposit receipt
would be generated from this event. The deposit receipt would be used to
record the amount involved.
c. A sales invoice would be used to record the amount of the sale of merchandise
to a customer for cash.
e. A remittance copy of the bills would be used to record the amount remitted, the
customer name and account number, and the specific invoices that were paid.
f. Stock certificates and checks would be generated by this event. The check
would be used to record the amount of stock purchased.
g. A loan agreement and other bank documents for the receipt of cash would be
generated by this event. The loan agreement would be used to record the
amount of the loan and the various terms such as the due date, the interest
rate, and any collateral.
1.
Stockholders’
Assets = Liabilities + Equity
Accounts Accounts Wages Retained
Date Cash Receivable Payable Payable Earnings
2/2 $ –400 $ –400
Bal. $ –400 $ –400
2/3 –3,230 $ –3,230
Bal. $ –3,630 $ –3,230 $ –400
2/4 –2,000 $ –2,000
Bal. $ –5,630 $ –3,230 $ –400 $ –2,000
2/15 8,000 $ –8,000
Bal. $ 2,370 $ –8,000 $ –3,230 $ –400 $ –2,000
2/26 16,800 16,800
Bal. $ 2,370 $ 8,800 $ –3,230 $ –400 $ 14,800
2/27 3,400 –3,400
Bal. $ 2,370 $ 8,800 $ 170 $ –400 $ 11,400
1. KRITTERSBEGONE INC.
TRANSACTIONS FOR THE MONTH OF JULY 2007
2. KRITTERSBEGONE INC.
BALANCE SHEET
JULY 31, 2007
Assets
Current assets:
Cash $ 9,450*
Accounts receivable 7,500
Prepaid rent 1,000
Total current assets $ 17,950
Property, plant, and equipment:
Equipment 18,000
Total assets $ 35,950
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 13,000
Unearned service revenue 600
Total current liabilities $ 13,600
Capital stock $ 18,000
Retained earnings 4,350**
Total stockholders' equity 22,350
Total liabilities and stockholders' equity $ 35,950
LO 3,4,5 PROBLEM 3-9A TRANSACTION ANALYSIS AND JOURNAL ENTRIES RECORDED DIRECTLY IN T-ACCOUNTS (APPENDIX)
1. Rapid City Roller Rink transactions for the month of October 2007:
Bal. 49,450
Building Equipment
(10/2) 75,000 (10/3) 25,000
(10/9) 3,500
Bal. 28,500
22,500 Bal.
4,275 5,600
1,325 Bal.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-55
Dr. Cr.
Cash $ 49,450
Accounts Receivable 375
Concession Supplies 2,500
Land 15,000
Building 75,000
Equipment 28,500
Accounts Payable $ 22,500
Notes Payable 81,000
Capital Stock 66,000
Retained Earnings 1,325
Totals $ 170,825 $ 170,825
Revenues:
Ticket sales $ 1,600*
Concession sales 3,250**
Rental revenue 750 $ 5,600
Expenses:
Utilities $ 1,275
Salaries and wages 2,250 3,525
Net income $ 2,075
Assets
Current assets:
Cash $ 49,450
Accounts receivable 375
Concession supplies 2,500
Total current assets $ 52,325
Property, plant, and equipment:
Land $ 15,000
Building 75,000
Equipment 28,500
Total property, plant, and equipment 118,500
Total assets $ 170,825
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 22,500
Long-term debt:
Notes payable 81,000
Total liabilities $ 103,500
Capital stock $ 66,000
Retained earnings 1,325
Total stockholders’ equity 67,325
Total liabilities and stockholders’ equity $ 170,825
a. Cash 150,000
Capital Stock 150,000
Issued 10,000 shares of capital stock for cash.
Assets = Liabilities + Stockholders’ Equity
+150,000 +150,000
c. Cash 100,000
Notes Payable 100,000
Signed five-year promissory note.
Assets = Liabilities + Stockholders’ Equity
+100,000 +100,000
d. Cash 5,000
Unearned Service Revenue 5,000
Received cash for services to be performed
over the next two months.
Assets = Liabilities + Stockholders’ Equity
+5,000 +5,000
1. T Accounts
Cash Accounts Receivable
(a) 150,000 400 (b) (f) 12,500
(c) 100,000 950 (e)
(d) 5,000 3,000 (g)
255,000 4,350
Bal. 250,650
Unearned
Service Revenue Notes Payable
5,000 (d) 100,000 (c)
Utilities Expense
(h) 100
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-59
Dr. Cr.
Cash $ 250,650
Accounts Receivable 12,500
Computer Software 950
Accounts Payable $ 100
Unearned Service Revenue 5,000
Notes Payable 100,000
Capital Stock 150,000
Consulting Revenue 12,500
Salaries and Wages Expense 3,000
Rent Expense 400
Utilities Expense 100
Totals $ 267,600 $ 267,600
Cash
(a) 120,000 14,600 (c)
(b) 30,000 12,500 (d)
5,200 (e)
150,000 32,300
Bal.117,700
Explanations:
(a) Issuance of capital stock for cash
(d) Advertising paid—must have been the amount paid because there is no
accounts payable or advertising payable.
(e) Rent paid—must have been the amount paid because there is no accounts
payable or rent payable.
LO 3,5,6 PROBLEM 3-14A JOURNAL ENTRIES (APPENDIX)
1. Journal entries:
Feb. 2 Wages Payable 400
Cash 400
Paid wages owed employees.
Assets = Liabilities + Stockholders’ Equity
–400 –400
Feb. 3 Accounts Payable 3,230
Cash 3,230
Paid for oil and gas billed in January.
Assets = Liabilities + Stockholders’ Equity
–3,230 –3,230
Feb. 4 Dividends 2,000
Cash 2,000
Declared and paid cash dividends.
Assets = Liabilities + Stockholders’ Equity
–2,000 –2,000
Feb. 15 Cash 8,000
Accounts Receivable 8,000
Received cash on open accounts.
Assets = Liabilities + Stockholders’ Equity
+8,000
–8,000
Feb. 26 Accounts Receivable 16,800
Service Revenue 16,800
Provided services on account
during February.
Assets = Liabilities + Stockholders’ Equity
+16,800 +16,800
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-61
1. Journal entries:
2. KRITTERSBEGONE INC.
BALANCE SHEET
JULY 31, 2007
Assets
Current assets:
Cash $ 9,450*
Accounts receivable 7,500
Prepaid rent 1,000
Total current assets $ 17,950
Property, plant, and equipment:
Equipment 18,000
Total assets $ 35,950
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 13,000
Unearned service revenue 600
Total current liabilities $ 13,600
Capital stock $ 18,000
Retained earnings 4,350**
Total stockholders’ equity 22,350
Total liabilities and stockholders’ equity $ 35,950
In the month of August, the company should have a cash inflow of $7,500 from
customers for services provided during July. Also, the company should have a
cash outflow of $13,000 to pay the balance due on the purchase of the
equipment. This cash flow information is useful to investors and creditors
because it helps them understand the prospects for the company in the future.
This type of information is particularly useful to bankers.
3-64 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASES
1. The largest expense for each company in the most recent year is “Cost of
sales.” The dollar amount of Finish Line’s cost of sales for the year ended
February 25, 2006, is $894,724,000. Foot Locker’s cost of sales for the year
ended January 28, 2006, is $3,944,000,000. It is logical that cost of sales is the
largest expense for each of these companies because they are merchandisers.
That is, they purchase products for resale to customers and cost of sales
represents the cost of those products sold during the current period.
2. The ratio of selling, general and administrative expenses to sales for each
company is as follows:
Finish Line’s ratio increased slightly during the most recent year, and Foot
Locker’s ratio decreased slightly. Foot Locker has the lower ratio in each of the
two most recent years.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-65
3. Finish Line reports income tax expense in each of the two most recent years of
$36,380,000 and $36,760,000. Foot Locker’s income tax expense is
$142,000,000 and $119,000,000. The ratio of income tax expense to income
before taxes for each company is as follows:
While Finish Line’s ratio of income tax expense to income before income taxes
did not change between years, Foot Locker experienced an increase in this
ratio from one year to the next. Finish Line has a higher ratio than Foot Locker
for both years. This tells the reader that Finish Line has incurred more income
tax expense relative to its income before income taxes than has Foot Locker.
3-66 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. For the year ended January 28, 2006, Foot Locker spent $155,000,000 on
purchases of property and equipment. The effect on the accounting equation is:
2. For the year ended January 28, 2006, Foot Locker paid $49,000,000 in
dividends. The effect on the accounting equation is:
4. The liability is reduced when customers use their tickets. At this point, Southwest
Airlines will reduce the liability account, Air Traffic Liability, and increase a
revenue account. This is an external event.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-67
1. YOUNG PROPERTIES
INCOME STATEMENT
FOR THE MONTH OF JANUARY
*$600,000 × 5%
**$400,000 × 4%
2. YOUNG PROPERTIES
STATEMENT OF CASH FLOWS
FOR THE MONTH OF JANUARY
As you requested, I reviewed the results of your operations for the first month
of business. Fortunately, your concerns about being “in the hole” are really not
justified. You did in fact have a good first month of sales and have every reason
to be encouraged about the future. I have enclosed copies of an income
statement and a statement of cash flows for January, which should significantly
alleviate any concerns you may have.
First, January’s net income of $10,000 is quite favorable, especially when
compared with the month’s sales of $30,000. You have been successful so far
in containing costs while running a viable operation. Second, the statement of
cash flows provides the specific explanations as to why the $20,000 in cash that
you started with is now down to $17,000. One major reason is that even though
your commissions revenue was $30,000, you still have $8,000 to collect from
these sales. You also had fairly significant cash drains up front for down
payments on the office equipment and the car. Without these expenditures, your
cash balance would have been $5,000 higher. You should keep in mind that the
remaining balance on the office equipment of $3,000 will be due on February
15. The remainder of $12,000 is due on the car in one year from the date of the
note.
I hope I have been able to alleviate your concerns about your new business.
Please let me know if I can be of any further assistance.
4. Assets are essentially unexpired costs and represent future benefits. Once
those benefits have been used up, the costs become expired and the asset is
no longer of any value. In accounting, the periodic process of recognizing the
expiration of benefits from tangible long-term assets, such as office equipment
and automobiles, is called depreciation. Depreciation is recognized over the life
of these assets as an expense on the income statement. The process of
recognizing depreciation will be examined in detail in later chapters.
1. It appears that Simon took the $20,000 cash he originally contributed to the
business and used it to buy mowing equipment and a truck. The effect on the
accounting equation would be:
Revenues:
Landscaping $ 33,400
Lawn care 24,000 $ 57,400
Expenses:
Gas and oil $ 15,700
Insurance 2,500
Rent 6,000
Salaries 22,000 46,200
Net income $ 11,200
3. Both the mowing equipment and the truck will benefit Fraser’s business for
several years, and he should attempt to allocate their cost over their estimated
useful lives. He has overstated his net income by ignoring depreciation on the
two long-term assets. Depreciation is an expense that should be recognized
over the lives of the long-term assets.
4. FRASER LANDSCAPING
BALANCE SHEET
SEPTEMBER 30, 2007
Assets
Current assets:
Cash $ 1,200
Accounts receivable 23,000
Total current assets $ 24,200
Property, plant, and equipment:
Mowing equipment $ 5,000
Truck 15,000
Total property, plant, and equipment 20,000
Total assets $ 44,200
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 13,000
Capital stock $ 20,000
Retained earnings 11,200
Total stockholders’ equity 31,200*
Total liabilities and stockholders’ equity $ 44,200
*Net income: $11,200 + Owners’ investments: $20,000.
The two items of most concern on the balance sheet are the large Accounts
Receivable and Accounts Payable. Over 40% of Fraser’s revenues remain
uncollected at the end of the season: $23,000 of accounts receivable on total
revenues of $57,400. If a significant portion of this amount becomes
uncollectible, Fraser may experience trouble in paying his open accounts.
3-70 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. No, the bookkeeper did not account for the client's deposit correctly. Because
the amount received from the client is a deposit for work to be done next year, it
represents a liability at the end of the year rather than revenue.
2. As controller for the firm, you are responsible for the accuracy and fairness of
the financial statements. You do have a moral and ethical responsibility to
correct the books, even though in so doing the income for the year will be
reduced. A reduction in the reported income will affect your year-end bonus, but
you have a responsibility on your part to the users of the financial statements
that supersedes any concerns over your personal financial situation.
CHAPTER 3 PROCESSING ACCOUNTING INFORMATION 3-71
1. Entries entered into the journal but not posted to the ledger accounts will not be
reflected in the financial statements. Failure to post the expense/cash
disbursement entry will mean that cash will be higher on the trial balance
prepared by the controller, and expenses will be lower. By ignoring a total of
$76,500 in various expenses, net income will be increased by the same
amount.
2. The controller is not correct in saying that the omission of the expense entry
“will not hurt anyone.” First, there is the basic issue: whether the company
should rightfully be required to pay bonuses on a profit level that was not
attained. Second, there is the related issue: the effect of this deceptive practice
on various constituencies of the company. What about the stockholders? They
have entrusted responsibility for managing the business in a fair and ethical
manner to the officers of the corporation. This particular practice would be a
serious violation of this trust. Finally, any number of outside users of the
financial statements could be misled by this practice. For example, a banker
relies on the income statement of a company to provide a clear and accurate
picture of the results of operations. The failure to accurately reflect the
expenses of the period results in information that is not free from bias and is
certainly misleading.
The purchase of furniture and fixtures is an external event for Foot Locker. The
recording of depreciation on the assets is an internal event.
Finish Lines has five current asset accounts on its balance sheet. Merchandise
inventories, net in the amount of $268,590,000 is the largest of these accounts.
Foot Locker reports four current assets, and the largest of them is also merchandise
inventories. The balance in this account is $1,254,000,000.
The journal entry to record the sale of a pair of running shoes for $100 cash would
be: